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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-KSB/A


ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended September 30, 2005


Commission file
number: 2-42114





Local Telecom Systems, Inc.


(Name of Small Business Issuer in Its Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|State of Nevada                                                    |  | 75-1310613                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)

1845 Woodall Rodgers, No. 1225


Dallas, Texas 75201


(Address of Principal Executive Offices)


Issuers Telephone Number including Area Code:


(214) 468-0000


Securities registered pursuant to Section 12(g) of the
Act:


Common stock, par value $0.0167


o


þ o


S-B 10-KSB 10-KSB. þ


12b-2 o þ




12b-2




DOCUMENTS INCORPORATED BY REFERENCE


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TABLE OF CONTENTS


|                                             |  |                                                                                          |    |  |    | 
|-------------------------------------------- |  | ---------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I                                      
|Item 1.                                      |  | Description of Business                                                                  |    |  | 3  | 
|                                             |  | (a) Business Development                                                                 |    |  | 3  | 
|                                             |  | (b) Business of the Issuer                                                               |    |  | 4  | 
|Item 2.                                      |  | Properties                                                                               |    |  | 9  | 
|Item 3.                                      |  | Legal Proceedings                                                                        |    |  | 9  | 
|Item 4.                                      |  | Submission of Matters to a Vote of Security
    Holders                                  |    |  | 9  | 
|                                            
|PART II                                     
|Item 5.                                      |  | Market for Common Equity and Related
    Stockholder Matters                             |    |  | 9  | 
|                                             |  | (a) Market Information                                                                   |    |  | 9  | 
|                                             |  | (b) Holders                                                                              |    |  | 9  | 
|                                             |  | (c) Dividends                                                                            |    |  | 9  | 
|                                             |  | (d) Securities Authorized for Issuance
    Under Equity Compensation Plans               |    |  | 10 | 
|Item 6.                                      |  | Plan of Operations                                                                       |    |  | 10 | 
|Item 7.                                      |  | Financial Statements                                                                     |    |  | 11 | 
|Item 8.                                      |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure |    |  | 11 | 
|Item 8A.                                     |  | Controls and Procedures                                                                  |    |  | 12 | 
|                                            
|PART III                                    
|Item 9.                                      |  | Directors, Executive Officers, Promoters
    and Control Persons                         |    |  | 13 | 
|Item 10.                                     |  | Executive Compensation                                                                   |    |  | 14 | 
|Item 11.                                     |  | Security Ownership of Certain Beneficial
    Owners and Management                       |    |  | 14 | 
|Item 12.                                     |  | Certain Relationships and Related
    Transactions                                       |    |  | 15 | 
|Item 13.                                     |  | Exhibits and Reports on Form 8-K                                                         |    |  | 15 | 
|Item 14.                                     |  | Principal Accountant Fees and Services                                                   |    |  | 15 | 
|INDEX TO EXHIBITS                            |  |                                                                                          | 33 | 
|302 Certification of Chief Executive Officer
|302 Certification of Chief Financial Officer
|906 Certification of Chief Executive Officer
|906 Certification of Chief Financial Officer



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FORWARD-LOOKING STATEMENTS


10-KSB 10-KSB




| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | changes in tax legislation;                                                          
|
| |  | federal and state regulations;                                                       
|
| |  | general economic conditions;                                                         
|
| |  | competitive factors and pricing pressures;                                           
|
| |  | our dependence on the services of key personnel;                                     
|
| |  | interest rates;                                                                      
|
| |  | risks associated with acquisitions;                                                  
|
| |  | significant intangible assets; and                                                   
|
| |  | our dependence on information processing systems and risk of
    errors or omissions.

10-KSB 10-KSB 10-KSB


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PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS




(a) Business Development
















| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | a) 18,675,000 shares for officer/director fees,
    consulting fees, note payments, preferred stock dividends and
    preferred stock conversion,
|
| | b) 15,000,000 shares for consulting on acquisitions
    and financing, and,                                                                      
|
| | c) 30,000,000 shares to reconvert the outstanding
    preferred stock to common shares.                                                          









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(b) Business of the Issuer




Mortgage Brokerage








| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | There are approximately of 44,000 Small and Medium Enterprise
    (SME) mortgage brokers in the United States.
|
| |  | Licensing is state issued and controlled and licenses can take 6
    to 9 months to obtain.                   
|
| |  | Approximately 73% of all mortgage originations in the US are
    through a mortgage broker.                   

Mortgage Banking








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Acquisition Strategy








|                               |  |   |       |        
|------------------------------ |  | - | ----- | -------
|Purchase Market                |  | $ | 1,585 | Billion
|Refinance Market               |  |   | 1,270 | Billion
|Home Equity Market             |  |   | 370   | Billion
|Total Consumer Lending Market: |  | $ | 3,225 | Billion

Source: Mortgage Bankers Association of America, 2005.






| |   |                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Housing construction over the next 10 years is anticipated
    to exceed that of the previous 10 years. According to
    State of the Nations Housing, Harvard University, 2004,
    the total number of new homes expected to be built between 2005
    and 2015 is 18.5 million to 19.5 million residences.
|
| |  | Automation has accelerated loan and mortgage approvals, lowered
    costs, and expanded access to credit. Multiple mortgage products
    with different amortization lengths, loan terms, and repayment
    privileges have helped to keep many more consumers in the market.                                









| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Traditional Mortgage Broker
    Operations  There are approximately 44,000 small
    to medium sized mortgage brokers from whom the majority of
    consumers transact mortgage purchases in their local market.
    Typically, these establishments do the most efficient job of
    guiding consumers through the mortgage process. In addition to
    servicing their established customers, these operations may call
    on local real estate agents, builders, etc. who have first
    contact with ready consumers in their area.
|
| | 2. Internet Mortgage Originations 
    Internet mortgage originations are a growing trend in the US, as
    consumers become more comfortable with Internet driven mortgage
    transactions. Although margins usually range around 50% and have
    lower closing ratios and sales revenues, this model serves a
    unique, growing customer segment and drives strong brand
    awareness.                                                                                                                                              
|
| | 3. High-End Mortgage Capabilities  With
    this capability, the company can recruit the best talent in the
    industry with large value/high credit customers and established
    books of business. This ability allows the company to bring on
    seasoned loan officers with favorable commission splits who can
    significantly impact production.                                                                                                                                                                                
|
| | 4. Specialty Niches (Non-Warrantable
    Condos) LTSI has identified several
    opportunities to leverage this business model with several
    lenders/investors of high rise condominiums, who are seeking a                                                                                                                                                                                                                                                                                                                             

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | joint venture partner to provide mortgage banking capabilities
    on warrantable and non-warrantable condos along the East Coast.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | 5. Direct to the Consumer  It
    is believed home mortgage applicants with low income and/or
    less-than-perfect credit pay lower financing costs when they
    obtain their mortgages through brokers rather than lenders. This
    rapidly expanding sector caters primarily to Hispanics
    throughout South Texas. The Company specializes in proven
    non-traditional solicitations, including broadcast e-mails,
    newspaper advertising, direct mail, apartment-owner to homeowner
    programs, etc. that could be replicated in similar demographic
    markets.

Employees




Competition






Government Regulation






| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | Mortgage brokers are licensed by their state of domicile                                   
|
| |  | Mortgage banking is regulated by federal and state banking laws                            
|
| |  | Mortgage lending is regulated by a number of federal and state
    consumer protection laws

RISK FACTORS


10-KSB




| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | WE ARE DEPENDENT UPON THE SUCCESS OF OUR PRIVATE PLACEMENT
    EFFORTS TO REPAY OUR SHORT-TERM OBLIGATIONS AND CONTINUE IN
    BUSINESS.





| |                                                          
| | ---------------------------------------------------------
| | WE MAY NOT HAVE ADEQUATE CASH TO FUND OUR
    OPERATIONS.



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| |                                                                              
| | -----------------------------------------------------------------------------
| | OUR LACK OF OPERATING HISTORY MAKES EVALUATION OF OUR
    BUSINESS DIFFICULT.





| |                                                                  
| | -----------------------------------------------------------------
| | CHANGES IN INTEREST RATES MAY HARM OUR RESULTS OF
    OPERATIONS.





| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | AN ECONOMIC SLOWDOWN OR RECESSION COULD REDUCE THE DEMAND
    FOR OUR MORTGAGE LOANS AND HARM OUR OPERATING RESULTS.





| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | FAILURE TO RENEW OR OBTAIN ADEQUATE FUNDING UNDER
    WAREHOUSE FACILITIES AND REPURCHASE AGREEMENTS MAY HARM OUR
    LENDING OPERATIONS.





| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | AN INTERRUPTION OR REDUCTION IN THE SECURITIZATION AND
    WHOLE LOAN MARKETS WOULD HURT OUR FINANCIAL PERFORMANCE.





| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | IF WE ARE UNABLE TO SELL A SIGNIFICANT PORTION OF OUR
    MORTGAGE LOANS ON AT LEAST A QUARTERLY BASIS, OUR EARNINGS WOULD
    DECREASE.



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| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | WE MAY BE REQUIRED TO REPURCHASE MORTGAGE LOANS OR
    INDEMNIFY INVESTORS IF WE BREACH REPRESENTATIONS AND WARRANTIES
    OR IF THE BORROWER DEFAULTS.





| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | IF WE ARE UNABLE TO COMPLY WITH MORTGAGE BANKING RULES AND
    REGULATIONS, OUR ABILITY TO MAKE MORTGAGE LOANS MAY BE
    RESTRICTED.





| |                                                                                       
| | --------------------------------------------------------------------------------------
| | CHANGES IN THE MORTGAGE INTEREST TAX DEDUCTION COULD
    DECREASE OUR LOAN PRODUCTION.





| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | OUR INDUSTRY IS HIGHLY COMPETITIVE, WHICH MAY ADVERSELY
    AFFECT OUR ABILITY TO GROW OUR CUSTOMER BASE AND GENERATE
    SALES.





| |                                    
| | -----------------------------------
| | WE ARE DEPENDENT ON OUR MANAGEMENT.





| |                                                                    
| | -------------------------------------------------------------------
| | THE MARKETABILITY OF OUR COMMON STOCK COULD BECOME
    JEOPARDIZED.



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ITEM 2.     PROPERTIES




|                                  |  |         |        |  |         |  |       |               |  |               
|--------------------------------- |  | ------- | ------ |  | ------- |  | ----- | ------------- |  | --------------
|                                  |  | Monthly |        |  | Square  |  |       |              
|Practice-Location                 |  | Rent    |        |  | Footage |  |       | Lease Expires
|                                  |  |         |        |  |         |  |       |              
|Executive offices, Dallas, Texas  |  | $       | 4,027  |  |         |  | 2,500 |               |  | Month to Month
|Mortgage banking, Austin, Texas   |  | $       | 11,800 |  |         |  | 8,000 |               |  | Month to Month
|Mortgage brokerage, Conroe, Texas |  | $       | 3,500  |  |         |  | 4,500 |               |  | Month to Month
|Mortgage brokerage, Laredo, Texas |  | $       | 1,351  |  |         |  | 1,200 |               |  | Month to Month




ITEM 3.     LEGAL
PROCEEDINGS







ITEM 4.     SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS


10-KSB





PART II





ITEM 5.     MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





(a) Market Information









(b) Holders









(c) Dividends




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(d) Securities Authorized for Issuance Under Equity
Compensation Plans




Issuance of Unregistered Shares


10-QSB







|        |                   
|------- | ------------------
|ITEM 6. | PLAN OF OPERATIONS

Disclosure Regarding Forward-Looking Statements


10-KSB 10-KSB 10-KSB,


General Discussion






Acquisitions






| |   |                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On March 25, 2005, and effective April 1, 2005, the
    Company acquired all of the outstanding Common Stock of MBI,
    Mortgage Services Ltd. for a total price of
    $1,000,000  $200,000 in notes and $740,000 of LTSI
    Common Stock
|
| |  | On September 30, the Company acquired all of the business,
    assets and goodwill of Lakeview Mortgage, Inc. for a total price
    of $350,000  $25,000 in notes and $325,000 of LTSI
    Common Stock                                     
|
| |  | On September 30, 2005, the Company acquired all of the
    business, assets and goodwill of Northland Funding, Inc.
    (Northland) for a total price of
    $1,000,000  $200,000 in notes and $800,000 of LTSI
    Common Stock          



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Results of Operations




|                   |  |   |            |  
|------------------ |  | - | ---------- | -
| Revenue          |  | $ | 1,081,625  |  
| Operating loss   |  |   | (1,944,076 | )
| Net loss         |  | $ | (2,905,075 | )
|                   |  |   |           
| Per common share |  | $ | (.40       | )
|                   |  |   |           



Income Taxes




Liquidity and Capital Sources






| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The acquisitions are totally dependent on internally generated
    cash flow to sustain their operations and meet their
    obligations. The Company cannot finance losses of the operating
    units and we can offer no assurance the acquisitions will
    generate sufficient cash flow to sustain themselves.
|
| |  | The Company is totally dependent on the success of the capital
    raising efforts to sustain its operations and complete its
    acquisition program.                                                                                                                                                            





| |   |                                                           
| | - | ----------------------------------------------------------
| |  | $1,600,000 of short-term private placement financing, and,
|
| |  | $10,000,000 of
    follow-on equity
    financing.        





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | At September 30, 2005, the Company was obligated in the
    amount of $559,379 of short-term notes. Subsequent to
    September 30, 2005, several of these notes went into
    default, and the Company was successful in negotiating
    extensions of the notes in exchange for the issuance of
    additional Common Stock and Common Stock purchase warrants to
    the Noteholders. We can offer no assurance the Company will be
    able to continue to negotiate extensions of the notes.






|        |                     
|------- | --------------------
|ITEM 7. | FINANCIAL STATEMENTS

10-KSB.







|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE



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10-KSB.







|         |                        
|-------- | -----------------------
|ITEM 8A. | CONTROLS AND PROCEDURES

13a-15(e) 15d-15(e)


(a) Evaluation of Disclosure Controls






(b) Changes in Internal Controls




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PART III







|        |                                                                 
|------- | ----------------------------------------------------------------
|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
    PERSONS



|                      |  |     |    |            |         |  |      |      |  |  |          |  |  |                                          
|--------------------- |  | --- | -- | ---------- | ------- |  | ---- | ---- |  |  | -------- |  |  | -----------------------------------------
|                      |  |     |    | Date First |         |  |      |      | 
|Name                  |  | Age |    |            | Elected |  |      | Term |  |  | Position
|                      |  |     |    |            |         |  |      |      |  |  |         
|Bruce A. Hall         |  |     | 48 |            |         |  | 2005 |      |  |  | 1 year   |  |  | Director, Chairman of the Audit Committee
|Richard M. Hewitt     |  |     | 68 |            |         |  | 2002 |      |  |  | 1 year   |  |  | Secretary, CFO, Director                 
|William R. Miertschin |  |     | 58 |            |         |  | 1997 |      |  |  | 1 year   |  |  | Chairman of the Board                    
|Patrick A. McGeeney   |  |     | 56 |            |         |  | 2005 |      |  |  | 1 year   |  |  | President, CEO, Director                 









Section 16(a) Beneficial Ownership Reporting
Compliance




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|         |                       
|-------- | ----------------------
|ITEM 10. | EXECUTIVE COMPENSATION










|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT



|                               |  |                                                                       |  |              |            |    |          |  |       | 
|------------------------------ |  | --------------------------------------------------------------------- |  | ------------ | ---------- | -- | -------- |  | ----- | 
|                               |  | Name and Address                                                      |  | Number of    |            |    | Percent  | 
|Title of Class                 |  | of Beneficial Owner                                                   |  | Shares Owned |            |    | of Class | 
|                               |  |                                                                       |  |              |            |    |          | 
|Common Stock $0.0167 Par Value |  | Corriente Rope Co., Inc.
    P.O. Box 607
    Albany, Texas 76430     |  |              | 15,000,000 |    |          |  | 18.5% | 
|Common Stock $0.0167 Par Value |  | Amber G. Smith
    6867 Anglebluff Circle
    Dallas, Texas 75248     |  |              | 26,302,800 | *  |          |  | 32.8% | 
|Common Stock $0.0167 Par Value |  | Stephen Grosberg
    601 E. 20th St. #8C
    New York, New York 10010 |  |              | 6,672,000  | ** |          |  | 8.3%  | 




| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| | * | Amber G. Smiths holdings include 26,000,000 shares of
    common stock owned by Concord Creek Corp. of which she is CEO
    and a Director.



|   |                                                                                                                                                                                                                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Stephen Grosbergs holdings include 160,000 shares of
    common stock owned by Stephen and Charles and Nettie Grosberg
    Foundation and 1,032,000 shares of common stock owned by
    Stephen Grosberg, custodian for Catherine Grosberg.
    Mr. Grosberg controls these entities.

Executive Officers and Directors


|                                                  |  |                                                                           |  |  |           |    |  |  |      | 
|------------------------------------------------- |  | ------------------------------------------------------------------------- |  |  | --------- | -- |  |  | ---- | 
|Common Stock
    $0.0167 Par Value                |  | William R. Miertschin
    7738 Forest Lane #102
    Dallas, Texas 75230   |  |  | 7,308,963 | *  |  |  | 9.1  | 
|                                                 
|Common Stock
    $0.0167 Par Value                |  | Richard M. Hewitt
    202 Fresh Meadow Drive
    Trophy Club, Texas 76262 |  |  | 2,017,242 | ** |  |  | 2.5  | 
|                                                 
|All Directors and Officers as a group (2 persons) |  |                                                                           |  |  | 9,326,205 |    |  |  | 11.6 | 




| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | William R. Miertschins holdings include
    2,000,000 shares of common stock owned by Cumberland
    Continental Corp. of which Miertschin is CEO and a Director.



|   |                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------
|** | Richard M. Hewitts holdings include 64,657 shares of
    common stock owned by Richard M. Hewitt, P.C. of which
    Hewitt is the principle.

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|         |                                               
|-------- | ----------------------------------------------
|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








|         |                                     
|-------- | ------------------------------------
|ITEM 13. | EXHIBITS AND REPORTS ON
    FORM 8-K

8-K









|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES



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SIGNATURES






| |                            
| | ---------------------------
| | LOCAL TELECOM SYSTEMS, INC.

|                    |  |                                                                    
|------------------- |  | -------------------------------------------------------------------
|Date: March 7, 2006 |  | /s/ William R. MiertschinBy: William R. Miertschin,
    Chairman   
|                   
|Date: March 7, 2006 |  | /s/ Patrick A. McGeeneyBy: Patrick A. McGeeney,
    President & CEO



|                                               |  |                 |  |               |  | 
|---------------------------------------------- |  | --------------- |  | ------------- |  | 
|Signature                                      |  | Title           |  | Date         
|                                               |  |                 |  |              
|                                              
|/s/ William R. MiertschinWilliam R. Miertschin |  | Chairman        |  | March 7, 2006
|                                              
|/s/ Patrick A. McGeeneyPatrick A. McGeeney     |  | President & CEO |  | March 7, 2006

16



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##### 










LOCAL TELECOM SYSTEMS INC.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                                             |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                             |  | Page |   
|                                                                                                                             |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                                                  |  |      | 18 | 
|Consolidated Balance Sheet as of
    September 30, 2005                                                                      |  |      | 19 | 
|Consolidated Statement of Operations for
    the period from March 25, 2005 (Inception) to
    September 30, 2005            |  |      | 20 | 
|Consolidated Statement of
    Stockholders Deficit for the period from March 25,
    2005 (Inception) to September 30, 2005 |  |      | 21 | 
|Consolidated Statement of Cash Flows for
    the period from March 25, 2005 (Inception) to
    September 30, 2005            |  |      | 22 | 
|Notes to Consolidated Financial
    Statements                                                                               |  |      | 24 | 



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















| |                                 
| | --------------------------------
| | /s/ Killman, Murrell & Co., P.C.
| |                                 
| | Killman, Murrell & Company, P.C.





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LOCAL TELECOM SYSTEMS INC.





CONSOLIDATED BALANCE SHEET


As of September 30, 2005


|                                                      |                                                                                                            |                                             |           |            |            |  
|----------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------- | --------- | ---------- | ---------- | -
|ASSETS                                               
|Current Assets                                        |                                                                                                            |                                             |           |           
|                                                      | Cash                                                                                                       |                                             | $         | 68,918     |           
|                                                      | Accounts receivable  loan fees                                                                            |                                             |           | 70,433     |           
|                                                      | Prepaid expenses                                                                                           |                                             |           | 8,183      |           
|                                                      | Deferred debt issue cost                                                                                   |                                             |           | 334,246    |           
|                                                      |                                                                                                            |                                             |          
|                                                      |                                                                                                            | Total Current Assets                        |           |            | 481,780    |  
|                                                      |                                                                                                            |                                             |          
|Equipment, Net of Accumulated Depreciation of $13,903 |                                                                                                            |                                             | 265,874   |           
|                                                      | Goodwill                                                                                                   |                                             |           | 2,023,161  |           
|                                                      | Other assets                                                                                               |                                             |           | 5,976      |           
|                                                      |                                                                                                            | Total Assets                                |           | $          | 2,776,791  |  
|                                                      |                                                                                                            |                                             |          
|LIABILITIES AND STOCKHOLDERS DEFICIT                
|Current Liabilities                                   |                                                                                                            |                                             |           |           
|                                                      | Notes payable                                                                                              |                                             | $         | 559,379    |           
|                                                      | Accounts payable                                                                                           |                                             |           | 216,751    |           
|                                                      | Accrued liabilities                                                                                        |                                             |           | 176,056    |           
|                                                      | Accounts payable  related parties                                                                         |                                             |           | 552,149    |           
|                                                      |                                                                                                            |                                             |          
|                                                      |                                                                                                            | Total Current Liabilities                   |           |            | 1,504,335  |  
|Unissued Common Stock                                 |                                                                                                            |                                             | 2,649,168 |           
|Unissued Preferred Stock                              |                                                                                                            |                                             | 1,150,000 |           
|                                                      |                                                                                                            |                                             |          
|Stockholders Deficit                                 |                                                                                                            |                                             |           |           
|                                                      | Preferred stock, par value $0.10, authorized shares 1,000,000,
    none issued                             |                                             |           |           |           
|                                                      | Common stock, $.0167 par value 100,000,000 shares
    authorized, 79,959,423 shares issued and outstanding |                                             |           | 1,335,323  |           
|                                                      | Additional paid-in-capital                                                                                 |                                             |           | (922,461   | )         
|                                                      | Accumulated deficit                                                                                        |                                             |           | (2,939,574 | )         
|                                                      |                                                                                                            |                                             |          
|                                                      |                                                                                                            | Total Stockholders Deficit                 |           |            | (2,526,712 | )
|                                                      |                                                                                                            |                                             |          
|                                                      |                                                                                                            | Total Liabilities and Stockholders Deficit |           | $          | 2,776,791  |  
|                                                      |                                                                                                            |                                             |          



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LOCAL TELECOM SYSTEMS INC.





CONSOLIDATED STATEMENT OF OPERATIONS


For the Period March 25, 2005 (Inception) to
September 30, 2005


|                                                             |                            |   |            |         |  
|------------------------------------------------------------ | -------------------------- | - | ---------- | ------- | -
|Loan Revenues                                                |                            | $ | 1,081,625  |        
|Cost of Revenues                                             |                            |   | 104,537    |        
|                                                             |                            |   |           
|Gross Profit                                                 |                            |   | 977,088    |        
|                                                             |                            |   |           
|Operating Expenses                                           |                            |   |            |        
|                                                             | Compensation               |   |            | 814,174 |  
|                                                             | General and administrative |   |            | 943,087 |  
|                                                             | Depreciation               |   |            | 13,903  |  
|Bad debt                                                     |                            |   | 1,150,000  |        
|                                                             |                            |   |           
|Total Operating Expenses                                     |                            |   | 2,921,164  |        
|                                                             |                            |   |           
|Loss from Operations                                         |                            |   | (1,944,076 | )      
|Interest Expense                                             |                            |   | 960,999    |        
|                                                             |                            |   |           
|Loss before Income Taxes                                     |                            |   | (2,905,075 | )      
|Income taxes                                                 |                            |   | -         |        
|                                                             |                            |   |           
|Net Loss                                                     |                            |   | (2,905,075 | )      
|Preferred Stock Dividends                                    |                            |   | (34,499    | )      
|                                                             |                            |   |           
|Net Loss Attributable to Common Shareholders                 |                            | $ | (2,939,574 | )      
|                                                             |                            |   |           
|Loss Per Share                                               |                            |   |            |        
|                                                             | Basic and diluted          |   | $          | (0.40   | )
|                                                             |                            |   |           
|Weighted Average Number of Common Shares (Basic and Diluted) |                            |   | 7,346,186  |        
|                                                             |                            |   |           



20



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.





CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT


For the Years Ended September 30, 2004 and 2005


|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |       |               |        |         |         |   |            |             |   |   |            |            |   |   |            |            |  
|-------------------------- | ------------------------------------------------------------------------------------- | ------------ | ---------- | ---------- | --------------- | - | --------- | ---------- |  |  | ----------- | -------- | ----- | ------------- | ------ | ------- | ------- | - | ---------- | ----------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                           |                                                                                       | Common Stock |            |            | Preferred Stock |   |           | Additional |  |  |             |          | Total |              
|                           |                                                                                       |              |            |            |                 |   |           | Paid-In    |  |  | Accumulated |          |       | Stockholders |       
|                           |                                                                                       | Shares       |            |            | Amount          |   |           | Shares     |  |  | Amount      |          |       | Capital       |        |         | Deficit |   |            | Deficit     |  
|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |       |               |        |         |         |   |            |             |  
|Balance September 30, 2004 |                                                                                       |              | 16,284,423 |            |                 | $ | 271,950   |            |  |  | 600,000     |          |       | $             | 60,000 |         |         | $ | 9,456,612  |             |   | $ | (9,911,284 | )          |   | $ | (122,722   | )         
|                           | Conversion of common to preferred stock                                               |              |            | 30,000,000 |                 |   |           | 501,000    |  |  |             | (600,000 | )     |               |        | (60,000 | )       |   |            | (441,000    | ) |   |            |           |   |   |            |           |  
|                           | Issuance of common stock for consulting, director fees,
    dividends, financing fees |              |            | 15,000,000 |                 |   |           | 250,500    |  |  |             |         |       |               |        |        |         |   |            |            |   |   |            |           |   |   |            | 250,500    |  
|                           | Issuance of common stock for consulting, director fees,
    dividends, financing fees |              |            | 18,675,000 |                 |   |           | 311,873    |  |  |             |         |       |               |        |        |         |   |            |            |   |   |            |           |   |   |            | 311,873    |  
|                           | Net loss                                                                              |              |            |           |                 |   |           |           |  |  |             |         |       |               |        |        |         |   |            |            |   |   |            | (555,689   | ) |   |            | (555,689   | )
|                           | Reclassify retained deficit to paid in capital                                        |              |            |           |                 |   |           |           |  |  |             |         |       |               |        |        |         |   |            | (10,466,973 | ) |   |            | 10,466,973 |   |   |            |           |  
|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |       |               |        |         |         |   |            |             |  
|Balance March 25, 2005     |                                                                                       |              | 79,959,423 |            |                 |   | 1,335,323 |            |  |  |            |          |       |               |       |         |         |   | (1,451,361 | )           |   |   |           |            |   |   | (116,038   | )         
|                           | 1,710,000 warrants issued in acquisition                                              |              |            |           |                 |   |           |           |  |  |             |         |       |               |        |        |         |   |            | 528,900     |   |   |            |           |   |   |            | 528,900    |  
|                           | Net Loss                                                                              |              |            |           |                 |   |           |           |  |  |             |         |       |               |        |        |         |   |            |            |   |   |            | (2,905,075 | ) |   |            | (2,905,075 | )
|                           | Preferred stock dividends                                                             |              |            |           |                 |   |           |           |  |  |             |         |       |               |        |        |         |   |            |            |   |   |            | (34,499    | ) |   |            | (34,499    | )
|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |       |               |        |         |         |   |            |             |  
|Balance September 30, 2005 |                                                                                       |              | 79,959,423 |            |                 | $ | 1,335,323 |            |  |  |            |          |       | $             |       |         |         | $ | (922,461   | )           |   | $ | (2,939,574 | )          |   | $ | (2,526,712 | )         
|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |       |               |        |         |         |   |            |             |  



21



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.





CONSOLIDATED STATEMENT OF CASH FLOWS


For the period March 25, 2005 (Inception) To
September 30, 2005


|                                   |                                                                                          |                                    |                                       |            |           |          |  
|---------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------- | ------------------------------------- | ---------- | --------- | -------- | -
|Operating Activities               |                                                                                          |                                    |                                       |           
|                                   | Net loss                                                                                 |                                    | $                                     | (2,905,075 | )        
|                                   | Adjustments to reconcile net loss to cash provided by operating
    activities:          |                                    |                                       |            |          
|                                   |                                                                                          | Bad debt                           |                                       |            | 1,150,000 |         
|                                   |                                                                                          | Amortization of debt issue costs   |                                       |            | 899,354   |         
|                                   |                                                                                          | Common stock issuable for services |                                       |            | 79,468    |         
|                                   |                                                                                          | Depreciation                       |                                       |            | 13,903    |         
|                                   | Changes in operating assets and liabilities (excluding the
    effects of acquisitions): |                                    |                                       |            |          
|                                   |                                                                                          | Accounts receivable                |                                       |            | (66,214   | )       
|                                   |                                                                                          | Prepaid expenses                   |                                       |            | (5,412    | )       
|                                   |                                                                                          | Accounts payable                   |                                       |            | 85,092    |         
|                                   |                                                                                          | Accounts payable  related parties |                                       |            | 482,648   |         
|                                   |                                                                                          | Accrued liabilities                |                                       |            | 149,317   |         
|                                   |                                                                                          |                                    |                                      
|                                   |                                                                                          |                                    | Cash used by operating activities     |            |           | (116,919 | )
|                                   |                                                                                          |                                    |                                      
|Investing Activities               |                                                                                          |                                    |                                       |           
|                                   | Purchase of equipment                                                                    |                                    |                                       | (10,656    | )        
|                                   |                                                                                          |                                    |                                      
|                                   |                                                                                          |                                    | Cash used in investing activities     |            |           | (10,656  | )
|                                   |                                                                                          |                                    |                                      
|Financing Activities               |                                                                                          |                                    |                                       |           
|                                   | Proceeds from notes payable                                                              |                                    |                                       | 399,379    |          
|                                   | Payments on notes payable                                                                |                                    |                                       | (200,000   | )        
|                                   | Preferred dividends                                                                      |                                    |                                       | (7,760     | )        
|                                   |                                                                                          |                                    |                                      
|                                   |                                                                                          |                                    | Cash provided by financing activities |            |           | 191,619  |  
|                                   |                                                                                          |                                    |                                      
|Net Increase in Cash               |                                                                                          |                                    | 64,044                                |           
|Cash Balance, Beginning of Period  |                                                                                          |                                    | 4,874                                 |           
|                                   |                                                                                          |                                    |                                      
|Cash Balance, End of Period        |                                                                                          | $                                  | 68,918                                |           
|                                   |                                                                                          |                                    |                                      
|Supplemental Cash Flow Information |                                                                                          |                                    |                                       |           
|                                   | Interest paid                                                                            |                                    | $                                     |           |          
|                                   |                                                                                          |                                    |                                      
|                                   | Income taxes                                                                             |                                    | $                                     |           |          
|                                   |                                                                                          |                                    |                                      



22



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


CONSOLIDATED STATEMENT OF CASH FLOWS


For the period March 25, 2005 (Inception) To
September 30, 2005  (Continued)


|                                                                                |                                               |   |            |          |  
|------------------------------------------------------------------------------- | --------------------------------------------- | - | ---------- | -------- | -
|Supplemental Non-Cash Information                                               |                                               |   |            |         
|Assets acquired and liabilities assumed in acquisition of MBI                   |                                               |   |            |         
|                                                                                | Accounts receivable, prepaid and other assets |   | $          | (64,378  | )
|                                                                                | Equipment                                     |   |            | (105,614 | )
|                                                                                | Goodwill                                      |   |            | (836,668 | )
|                                                                                | Accounts payable                              |   |            | 6,660    |  
|                                                                                | Notes payable                                 |   |            | 260,000  |  
|                                                                                | Common stock issuable                         |   |            | 740,000  |  
|Assets acquired and liabilities assumed in acquisition of
    Northland Funding |                                               |   |            |         
|                                                                                | Equipment                                     |   |            | (71,775  | )
|                                                                                | Goodwill                                      |   |            | (928,225 | )
|                                                                                | Notes payable                                 |   |            | 200,000  |  
|                                                                                | Common stock issuable                         |   |            | 800,000  |  
|Assets acquired and liabilities assumed in acquisition of
    Lakeview Mortgage |                                               |   |            |         
|                                                                                | Equipment                                     |   |            | (91,732  | )
|                                                                                | Goodwill                                      |   |            | (258,268 | )
|                                                                                | Notes payable                                 |   |            | 25,000   |  
|                                                                                | Common stock issuable                         |   |            | 325,000  |  
|Mortgage note acquired                                                          |                                               |   | (1,150,000 | )       
|Preferred stock issuable                                                        |                                               |   | 1,150,000  |         
|Debt issue cost                                                                 |                                               |   | (1,233,600 | )       
|Common stock issuable                                                           |                                               |   | 704,700    |         
|Paid-in-capital from debt issue cost                                            |                                               |   | 528,900    |         
|Preferred dividend payable                                                      |                                               |   | 26,739     |         
|Preferred dividend                                                              |                                               |   | (26,739    | )       
|                                                                                |                                               |   |           
|                                                                                |                                               | $ |           |         
|                                                                                |                                               |   |           



23



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


September 30, 2005




|   |                                                                        
|-- | -----------------------------------------------------------------------
|1. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES



| |             
| | ------------
| | Organization







| |                    
| | -------------------
| | Basis of Accounting







| |                    
| | -------------------
| | Revenue Recognition





| |                 
| | ----------------
| | Use of Estimates



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |            
| | -----------
| | Advertising





| |                              
| | -----------------------------
| | Office and Computer Equipment





| |         
| | --------
| | Goodwill





| |             
| | ------------
| | Income Taxes





| |                     
| | --------------------
| | Comprehensive Income





| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets



25



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                   
| | ------------------
| | Net Loss Per Share







| |              
| | -------------
| | Contingencies









| |            
| | -----------
| | Commitments

month-to


26



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                          
| | -------------------------------------------------------------------------
| | Concentrations of Credit Risk and Fair Value of Financial
    Instruments







| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements







|   |             
|-- | ------------
|2. | ACQUISITIONS

MBI Mortgage Services, Ltd.






| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | 3,470,000 unissued post-split shares of the Companys
    common stock at a valuation of $0.21 per share or $740,000.
|
| |  | Note payable to the seller of $260,000.                                                                              
|
| |  | A consulting agreement with the prior owner for 24 months
    at a cost of $2,000 per month.                         

27



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1,305,000 unissued post-split shares issued to note guarantors,
    valued at $704,700 which is to be amortized over the life of the
    notes.                                                        
|
| |  | Warrants to purchase an additional 1,710,000 post-split shares
    of the Companys common stock over the next three years at
    purchase prices of $0.20 to $0.35 per share 
    valued at $528,900.
|
| |  | Cash of $300,000 borrowed on short term notes from unrelated
    parties.                                                                                                                              





|  |  |                                                                                                       |  |   |           | 
|- |  | ----------------------------------------------------------------------------------------------------- |  | - | --------- | 
| |  | Tangible assets, principally computers and office equipment, net
    of liabilities accrued of $6,600 |  | $ | 163,332   | 
| |  | Goodwill                                                                                              |  |   | 836,668   | 
|  |  |                                                                                                       |  |   |          
| |  | Total Purchase Price                                                                                  |  | $ | 1,000,000 | 
|  |  |                                                                                                       |  |   |          









| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lakeview Mortgage, located in Laredo, Texas, is an independent
    mortgage broker engaged in the securing of mortgage loans for
    home buyers in the Laredo, Texas market.      
|
| |  | Northland Funding Group, located in Austin, Texas, is an
    independent mortgage broker engaged in the securing of mortgage
    loans for home buyers in the Austin, Texas market.





| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | 880,000 unissued post-split shares of common stock valued at
    $1,125,000.
|
| |  | Short-term notes payable to the sellers of $225,000.                        





| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | Warrants to purchase 250,000 post-split shares of the
    Companys common stock exercisable at $0.20.





|  |  |                                                             |  |   |           | 
|- |  | ----------------------------------------------------------- |  | - | --------- | 
| |  | Tangible assets, principally computers and office equipment |  | $ | 163,504   | 
| |  | Goodwill                                                    |  |   | 1,186,496 | 
|  |  |                                                             |  |   |          
| |  | Total Purchase Price                                        |  | $ | 1,350,000 | 
|  |  |                                                             |  |   |          



28



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                          |                            |   |         |           | 
|----------------------------------------- | -------------------------- | - | ------- | --------- | 
|1,305,000 unissued shares of common stock |                            | $ | 704,700 |          
|1,710,000 warrants                        |                            |   | 528,900 |          
|                                          |                            |   |        
|                                          | Total deferred issue costs |   |         | 1,233,600 | 
|Amortization expense                      |                            |   | 899,354 |          
|                                          |                            |   |        
|Deferred debt issue costs                 |                            | $ | 334,246 |          
|                                          |                            |   |        



|   |                               
|-- | ------------------------------
|3. | EQUITY INTEREST IN REAL ESTATE







|   |              
|-- | -------------
|4. | NOTES PAYABLE



|                                                                                                                                                                           |  |   |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | 
|10% note payable to a company, principal and interest due
    November 5, 2005, secured by the Companys stock and
    shareholder guarantee, paid in December 2005        |  | $ | 250,000 | 
|10% note payable to a company, principal and interest due
    November 5, 2005, secured by the Companys common
    stock and shareholder guarantee, paid in December 2005 |  |   | 46,000  | 
|10% note payable to an individual, principal and interest
    due May 5, 2006, secured by Company stock                                                                    |  |   | 60,000  | 
|10% note payable to a company, principal and interest due
    January 6, 2006, secured by Company stock and shareholder
    guarantee                                      |  |   | 50,000  | 
|Non-interest bearing note payable to a shareholder, due
    March 27, 2006, secured by Company common stock                                                                |  |   | 53,379  | 
|Non-interest bearing note payable to two individuals, due on
    June 30, 2006, secured by Company stock                                                                   |  |   | 100,000 | 
|                                                                                                                                                                           |  |   |        
|                                                                                                                                                                           |  | $ | 559,379 | 
|                                                                                                                                                                           |  |   |        

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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |             
|-- | ------------
|5. | INCOME TAXES



|                                    |  |   |          |  
|----------------------------------- |  | - | -------- | -
|Tax Benefit at Statutory Rate (34%) |  | $ | (987,725 | )
|Change in valuation Allowance       |  |   | 985,064  |  
|Non-Deductible Expenses             |  |   | 2,661    |  
|                                    |  |   |         
|                                    |  | $ |         |  
|                                    |  |   |         



|                       |  |   |          |  
|---------------------- |  | - | -------- | -
|Deferred Tax Asset     |  | $ | 985,064  |  
|Valuation Allowance    |  |   | (985,064 | )
|                       |  |   |         
|Net Deferred Tax Asset |  | $ |         |  
|                       |  |   |         





|   |                      
|-- | ---------------------
|6. | STOCKHOLDERS DEFICIT





| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 18,675,000 shares for officer/director fees, consulting
    fees, note payments, preferred stock dividends and preferred
    stock conversion fees.
|
| |  | 15,000,000 shares for consulting on acquisitions and
    financing, and,                                                                           
|
| |  | 30,000,000 shares to reconvert the outstanding preferred
    stock to common shares.                                                               







| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | 4,779,998 shares of common stock to various parties with
    the acquisition of MBI Mortgage, Inc.                  
|
| |  | 240,000 shares of common stock to the former owner in
    connection with the acquisition of Lakeview Mortgage, Inc.
|
| |  | 640,000 shares of common stock to the former owners of
    Northland Funding Group, Inc.                            
|
| |  | 87,000 shares of common stock to various officers,
    directors and vendors in return for services.                

30



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Warrants granted to existing shareholders on May 25, 2005
    to purchase 1,599,188 shares for $1.00 per share for
    up to one year and 1,599,188 shares for up to $2.00 for two
    years. These warrants are separate and do not co-extinguish
|
| |  | Warrants issued to various parties in connection with the
    acquisition of MBI Mortgage Services, Ltd. for
    1,710,000 shares at a price of $0.20 to $0.35 per
    share for three years.                                                     
|
| |  | Warrants issued in connection with the acquisition of Northland
    Funding Group, Inc. for 1,475,000 shares of which 250,000
    are performance based and 1,225,000 are exercisable at a price
    of $0.20 per share for three years.          
|
| |  | In connection with an extension of a note, warrants to purchase
    150,000 shares of common stock were issued at a price of
    $0.20 per share for three years.                                                                                 



|   |                           
|-- | --------------------------
|7. | RELATED PARTY TRANSACTIONS





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Principal owners have provided collateral in the form of their
    common stock of the Company for borrowings incurred for
    acquisitions and working capital. For this they have been
    granted warrants to purchase 835,000 shares of common stock
    at exercise prices of $0.20 to $0.35 for a period of three years.                                                                                                                                                                                                                                                                        
|
| |  | The Company has borrowed $50,000 directly from a principal owner
    for which the principal owner has received warrants to purchase
    150,000 shares of the Companys common stock at a
    price of $0.20 per share for three years.                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The Chief Executive Officer has personally guaranteed a third
    party loan for which he has received warrants to purchase
    25,000 shares of the Companys common stock.                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The former spouse of the Chief Executive Officer is the owner of
    the real estate that LTSI has an equity interest in. The real
    estate is subject to first and second lien mortgages. The first
    lien mortgage is approximately $400,000. The second lien
    mortgage has been assigned to LTSI in the amount of $1,150,000.                                                                                                                                                                                                                                                               
|
| |  | The Chairman of the Board is a member of Bajjer, LLC, from which
    the Company purchased MBI and has an on-going consulting
    relationship. Effective July 1, 2005, LTSI entered into a
    consulting agreement whereby Bajjer will receive a consulting
    fee of eighteen (18) basis points for all consolidated
    originated mortgage loan volume originated by MBI. LTSI also
    agreed to pay Bajjer a one time fee for prior services in the
    amount of $325,000 due on or before September 30, 2006.
    Consulting fees accrued relative to this consulting agreement
    include:

|                                    |  |   |         | 
|----------------------------------- |  | - | ------- | 
|Prior consulting fee                |  | $ | 325,000 | 
|Consulting fee based on loan volume |  |   | 37,609  | 
|                                    |  |   |        
|                                    |  | $ | 362,609 | 
|                                    |  |   |        



| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Chairman of the Board has an additional six months
    consulting agreement at $10,000 per month. At
    September 30, 2005, the Company had accrued $30,000 on the
    agreement.

31



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                       |                          |   |         |         | 
|-------------------------------------- | ------------------------ | - | ------- | ------- | 
|Amounts paid by MBI on behalf of LTSI: |                          |   |         |        
|                                       | Consulting fees          |   | $       | 392,609 | 
|                                       | Professional fees        |   |         | 144,914 | 
|                                       | Travel and entertainment |   |         | 4,271   | 
|                                       | Office expenses          |   |         | 10,355  | 
|                                       |                          |   |        
|                                       |                          | $ | 552,149 |        
|                                       |                          |   |        



|   |                                                     
|-- | ----------------------------------------------------
|8. | WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING



|                                                                       |  |                |            | 
|---------------------------------------------------------------------- |  | -------------- | ---------- | 
|                                                                       |  | Period         |           
|                                                                       |  | March 25, 2005 |           
|                                                                       |  | (Inception) to |           
|                                                                       |  | September 30,  |           
|                                                                       |  | 2005           |           
|                                                                       |  |                |           
|Shares outstanding September 30, 2005                                  |  |                | 79,959,423 | 
|Give effect to the prospective one-for-fifty reverse stock split       |  |                | ÷ 50       | 
|                                                                       |  |                |           
|Shares outstanding after proposed split                                |  |                | 1,599,188  | 
|Shares to be issued for MBI                                            |  |                | 4,779,998  | 
|Shares to be issued for Lakeview                                       |  |                | 240,000    | 
|Shares to be issued for Northland                                      |  |                | 640,000    | 
|Shares to be issued for services                                       |  |                | 87,000     | 
|                                                                       |  |                |           
|Weighted average shares outstanding for Loss Per Share
    Calculation |  |                | 7,346,186  | 
|                                                                       |  |                |           



|   |                  
|-- | -----------------
|9. | SUBSEQUENT EVENTS







|    |              
|--- | -------------
|10. | GOING CONCERN





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##### Table of Contents






INDEX TO EXHIBITS


|            |    |             |  |                                             
|----------- | -- | ----------- |  | --------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 31 | (i)         |  | 302 Certification of Chief Executive Officer
|            | 31 | (ii)        |  | 302 Certification of Chief Financial Officer
|            | 32 | (i)         |  | 906 Certification of Chief Executive Officer
|            | 32 | (ii)        |  | 906 Certification of Chief Executive Officer

Exhibits Incorporated by Reference


8-K


8-K





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